What are CDFIs?
CDFIs are a viable funding source for social enterprise startups and a great way to encourage sustainability in non-profit organizations.
The roots of what are now called Community Development Financial Institutions (or CDFIs) reach all the way back to New York’s immigrants in the late 1800s and the African American community back in the 1930’s. Both groups created community-based credit organizations to enrich their communities because traditional institutions had abandoned them.
Today, CDFIs are composed of a diverse group of investors who lend to individuals, small- to medium-sized businesses, startups and non-profits, emphasizing the importance of a double bottom line. Of course, the bottom line is always money – but the double bottom line investment strategy underlines both financial return and social return.
So CDFIs are unique in the fact that they focus on socially responsible lending.
The Funding Gap for Non-Profit Operational Support
Put simply, non-profits need a more sustainable business model. Funding and grant support alone just isn’t sustainable because funding is often easier to obtain for social programs. So, when programs seek and receive diverse funding sources, each program must morph into multiple versions of itself to meet each source’s requirements. (For example, a literacy program might receive funds from workforce development, creative and literacy sources combined.)
So, these non-profit programs are limited by policy and, at the same time, the non-profit as a business lacks the operational and technological support required to sustain its model. This is exactly where non-profits struggle – and it’s a difficult cycle to break.
CDFIs: Breaking the Cycle
Some CDFIs are entirely focused on serving non-profits, but they lend in a way that encourages sustainability. Non-profits may borrow, but typically only when they have a funding gap. This is mutually beneficial: the non-profit gets money when they need it, and the CDFI makes a good investment, both financially and socially, increasing both their social and financial reputation.
And get this: CDFIs experience a default rate of less than 1%! They are conservative lenders and their practices benefit everyone involved.
An operationally sustainable non-profit provides services, receives (possibly partially subsidized) payments for those services, so that money brought in supports the basic program and operational costs. Then, any additional grants or funding can be freed up to help expand operational activities, such as improving and managing workflow and/or technology systems.
CDFIs look at non-profits in terms of those standard business practices; lending isn’t program based, so it’s just the opposite of a third-party funded model. Operational and technological support are seen as necessary to increase business potential. This is the sustainable model that non-profits should be moving towards.
WI CDFI Tax Incentives
Just this past fall, Wisconsin passed into law a bill called Assembly Bill 211, which provides state income and franchise tax credits to those who invest in CDFIs. The state took a very positive step forward with this initiative, which will benefit non-profit sustainability and promote social entrepreneurship in our communities. When it’s easier to invest in CDFIs, then CDFIs have the opportunity to further invest in Milwaukee and improve Wisconsin communities.
For more information on CDFIs, visit CDFI.org.